Minnesota Just Made it Harder for Insureds to Claim ‘Bad Faith’


By: Matthew Jones

In the matter entitled Fishbowl Solutions v. Hanover Ins. Co., the United States District Court for Minnesota affirmed a Magistrate Judge’s Order denying an insured’s motion to amend the complaint to allege “bad faith.” The insured purchased a technology professional liability policy. When a third-party fraudster obtained access to emails of the insured, the carrier denied coverage stating the fraudster’s actions did not impair business operations under the terms of the policy. This denial led to litigation over coverage of the claim. During the litigation, the insured tried to amend its complaint to add a cause of action for “bad faith.” The Judge analyzed the proposed amendment pursuant to Minn. Stat. section 604.18, which was the legislature’s cause of action for “bad faith.”

The statute includes a two-prong test: whether the carrier lacked a reasonable basis for denying the policy’s benefits and whether the coverage issues were “fairly debatable.” The Judge found that although the insured properly pled the first prong, it failed on the second prong. The basis for this determination was that there is an unresolved legal question whether coverage applies to losses caused by a “man in the middle” cyberattack. As a result, the Judge found the coverage issue “fairly debatable,” and therefore, cannot serve as a basis for a claim of “bad faith.”

Although the District Court pointed out that the insured’s position may ultimately be correct regarding coverage, that is not the standard, as the viability of a “bad faith” claim revolves around the carrier’s interpretation of the policy that creates “reasonable disagreement” regarding coverage. This position, pursuant to statute, makes it difficult to bring “bad faith” claims against carriers in Minnesota, while providing clarity to potential arguments to assert by carriers in opposition to such motions and claims.

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